[RT] Now its Behavioral Finance

["Dorothy K. Carter" <dorothy.carter@xxxxxxxx>]

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  width=600><FONT color=#cc0033 
face="verdana, geneva, arial, sans serif" size=-1>Celestial 
investing <FONT face="verdana, geneva, arial, sans serif" 
size=+1>What a little moonlight can do<FONT color=#999999 
face="verdana,geneva,arial,sans serif" size=-2>
Oct 18th 2001 From The Economist print 
edition<FONT face="verdana,geneva,arial,sans serif" 
size=-1>How the sun and the moon move markets 
WHEN ace traders call 
themselves &#8220;Masters of the Universe&#8221;, they speak truer than they know. There is 
a growing, heavenly body of evidence that share prices are influenced by forces 
from outer space&#8212;well, the sun and the moon, anyway. Master these 
inter-planetary forces, and you master the markets. 
Seven souls have boldly 
gone where no economists have gone before, producing no fewer than three new 
papers quantifying extra-terrestrial influences at work in world stockmarkets. 
David Hirshleifer, of Ohio State University, and Tyler Shumway, of the 
University of Michigan, have taken a long look at the sun. Across 26 
stockmarkets, in 1982-97, they found that, on days with more sunshine in the 
morning than usual, shares generated above-average gains, and lower gains on 
unusually cloudy days. After taking sunshine into account, other weather 
conditions such as snow or rain turned out to have no impact on share 
returns.
The effect of the sun 
seems to have been quite big. For shares traded in New York, for instance, 
annualised returns on perfectly sunny days averaged 24.8%, compared with 8.7% on 
perfectly cloudy days. Moreover, unlike some stockmarket &#8220;anomalies&#8221; discovered 
by economists, investing by the sun would have been more profitable than simply 
investing in the market index, even after subtracting trading costs. Alas, this 
does not guarantee profitable trading in the future. Even assuming the effect 
really exists, investors, now they have been alerted to it, will probably 
arbitrage away any excess returns to be had by exploiting it.
The other two papers, 
both published by the University of Michigan, look a little closer to home, at 
the moon. Kathy Yuan, Lu Zheng and Qiaoqiao Zhu examined share returns in 48 
countries until the end of July 2001, from start dates as far back as 1965. They 
found that, on average, daily returns were much higher around new moons than 
full moons, when investors are presumably sprouting fangs and howling rather 
than buying shares. Returns were 8.3% lower in weeks with a full moon than ones 
with a new moon. The lunar effect held in 43 of the 48 countries, and investing 
by it would have been profitable even after trading costs.
Ilia Dichev and Troy 
Janes reach a similar conclusion from a study of 100 years of American share 
prices, and at least 15 years' data in each of 24 other countries. Daily returns 
around new moons were roughly double those around full moons. The lunar effect 
is strongest outside America. All seven economists insist that their results are 
not the product of data-mining&#8212;crunching the numbers in search of any 
interesting pattern they can find. Rather, the results are the latest 
manifestation of behavioural finance, which seeks to show how psychological 
patterns explain apparent market inefficiencies.
Still, although it is 
widely believed that the phases of the moon affect behaviour, psychologists have 
yet convincingly to prove it. The behavioural economists reckon this may be 
because psychologists have focused on trying to link the moon to extreme 
behavioural problems in a few disturbed people, rather than to more humdrum 
lunacies affecting humanity as a whole, including a bias against shares around 
full moons.
There is, on the other 
hand, stronger scientific evidence that sunshine puts people in a better mood, 
as well as making them more credulous. You will find that, even as you reach for 
your diary for the next new moon, the sun is surely shining. <BR 
clear=all>

  
  
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    <FONT color=black 
      face="Verdana, Arial, Helvetica, sans-serif" size=-2>Copyright © 2001 The 
      Economist Newspaper and The Economist Group. All rights 
      reserved.
  
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